Investment Overview for Boeing (NYSE:BA)

Commercial Airplanes EBITDA margin stood at 11.5% in 2014. We expect margins for the division to rise by the end of the Trefis forecast due to production rates hikes of the 737, which is a higher margin airplane for Boeing. However, if margin declines to 10% by the end of the forecast period due to stiff price competition from Airbus and development or delivery delays of 737MAX, then there could be a potential downside of about 10% to ${trefisprice}.

On the other hand, if margins rise to 14% by the end of the Trefis forecast period driven by cost-cutting measures or growth in top line on higher airplane deliveries then there could be a potential upside of around 10% to ${trefisprice}.

Boeing commercial aircraft deliveries represented about 31.4% of global commercial aircraft deliveries in 2008. This figure rose to 37%-38% during 2009-11 and further to 44.9% in 2014 driven by production rate hikes of the 737, 777 and 787.

Going forward, we expect Boeing's share of the global commercial airplane market to remain stable through the Trefis forecast period. If however, due to increased competition from regional jet makers Bombardier and Embraer, and entry of new players such as China's Comac, Russia's Irkut and Mitsubishi's Regional Jet, Boeing's market share falls to 40%, then there could be a potential downside of around 10% to ${trefisprice}.

${header:summary}

Boeing is one of the two major manufacturers of 100+ seat aircraft for the global commercial airplane industry. The other major airplane maker in this category is Airbus. Boeing designs, develops, manufactures, sells, and services commercial jetliners such as the single-aisle 737, and twin-aisle 777, 787, and 747.

Apart from commercial aviation, Boeing has a defense contracting business. The company is the second largest defense contractor of the U.S. government after Lockheed Martin.

To promote sales of its commercial airplanes, Boeing offers leasing solutions to airlines through its Boeing Capital Corporation (BCC) segment.

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The commercial airplanes division is the largest contributor to Boeing's total value. The key factors responsible for this are:

Established position as one of the two largest aircraft manufacturers

Aircraft manufacturing requires significant upfront capital, research and development expenditure. Boeing has made these investments over the last several decades to establish itself as one of the largest commercial aircraft manufacturers.

A large number of airlines in the world operate Boeing airplanes. These airlines have long, established relationship with Boeing as their airplane provider.

Other companies including Embraer, Bombardier, Comac, Russian Irkut or Mitsubishi that are looking to play a larger role as a commercial airplane manufacturer face enormous competition from both Boeing and Airbus. In contrast, airlines have a working relationship with Boeing and Airbus for most of their airplanes. This track record and existing relationships provide both Boeing and Airbus with a significant competitive advantage over smaller and relatively new airplane makers.

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Aircraft demand is strongly tied to global economic growth

A decline in passenger and cargo traffic due to the global recession in 2009 adversely impacted revenues/margins for commercial airlines world over. This in turn affected aircraft demand. In recent years, as the global economy has steadily grown, airlines have seen their profits rise. Higher profits in turn have enabled airlines to place orders for new airplanes, growing results of airplane makers such as Boeing. So, going forward, we figure if global economy continues to grow, demand for air travel and new airplanes will also rise.

Expansion of low-cost airlines (LCC) is boosting growth in the single-aisle airplane segment

Low-cost airlines or carriers (LCC) are fast expanding around the world. They provide an alternative to other modes of transportation such as railways.

LCCs typically use single-aisle aircraft such as Boeing's 737 and Airbus' A320. Growth of LCCs is primarily a consequence of increased liberalization in the commercial aviation industry that has reduced entry barriers for private players. This is especially true in the emerging countries of the Asia-Pacific region where liberalization driven by the Association of Southeast Asian Nations (ASEAN) has boosted growth of many LCCS. We expect regulatory hurdles in the commercial airline industry to continue to decline world over, paving for growth of LCCs. And expansion of LCCs will boost demand for single-aisle airplanes.

Unionized workforce

Over 40% of Boeing's total workforce were represented by unions. The company experienced a work force stoppage in 2008 due to the IAM (International Association of Machinists and Aerospace Workers) strike. Similar stoppages in the future have a potential to significantly impact business through delays in production and the development of Boeing's products and services.

Increase in fixed price contracts

A large portion of revenue from Boeing's defense business, Defense, Space and Security (DSS) division, is generated from fixed price contracts. With a 2009 directive by the Office of Management and Budget (OMB) to further migrate from cost-based to fixed-price based contracts, we expect the company's DSS division to be subjected to higher risk, as any cost over-runs would directly impact margins under a fixed-price contract (unlike a cost-reimbursement contract, where the contractor is paid for all of its allowed expenses to a set limit plus additional payment to allow for a profit). This trend can impact DSS margins in future years.

Boeing's defense business is highly dependent on US military spending

Boeing generates about 80% of its defense, space and security (DSS) division revenues from the US government through its various agencies such as the Department of Defense and NASA. Owing to this high degree of dependence on the U.S. government, Boeing is vulnerable to any cuts in the government's military spending.

${forecast} refers to the operating profit expressed as a percentage of revenues. Operating profit is calculated by subtracting total operating expenses from the revenues generated in this division (except D&A). These expenses include purchases of raw materials and other products, marketing expenses, general and administrative expense, research & development expense and other operating expenses.

${header:historicals}

${forecast} was around 65% in 2009. It recovered steadily since to 75.4% in 2012 supported by a recovery in the global economy. It however, fell to 68.2% in 2013 and 58.3% in 2014.

Going forward we expect margins to remain stable at around the current levels over the Trefis forecast period.

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Trefis considered the following factors for its forecast:

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Lower credit risk for customers

The decline in margin for 2009 was attributable to a higher provision for losses which arose due to a risk of termination/default in lease payments.

As the global economy improves, we expect the credit worthiness of customers (majorly airline companies) to improve, leading to lower loss provision for the division as default/termination risk decreases.

Improved balance sheet will lead to higher profits

Boeing Capital Corporation, like all other finance companies who suffered during the recession of 2008-09 have realized that having a smaller portfolio with less risky assets is better than having a large portfolio with lots of risky assets. This realization has led BCC to significantly reduce the size of its balance sheet and improve its asset quality, thus leading to better operating margins. We expect this trend to continue in the future.

How Does Trefis Modelling Work?

How do we get the historical numbers for this chart?

Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.

Who came up with the Trefis forecast for future years?

The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.

How does my dragging the trendline on the chart impact the stock price?

We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.

We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.

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